Estee Lauder Resets Base Count, Awaits Market Uptrend

During the spring and summer as the indexes groped for short-term lows, Estee Lauder (EL) fell 24%.

The correction proved useful. Estee Lauder shaped a cup-with-handle base and undercut the low of the previous base. The undercut reset the base count.

The stock cleared the 62.08 buy point on Oct. 1, but volume was only 31% above average. A breakout should show a volume spike of at least 40%. This tells investors that funds are behind the move.

Estee Lauder rose about 5% and then declined. The stock corrected in subdued volume and is now testing its 50-day moving average.

If the market were to shift to a confirmed uptrend, Estee Lauder might be in position to recross the 62.08 buy point or bounce off the 50-day line. In both cases, strong volume is needed.

Earnings increased 42% in fiscal Q4, ended in June, as sales rose 9%.

At the August earnings call, CEO Fabrizio Freda said the sales increase "was about twice the rate of global prestige beauty, which means we gained share and further strengthened our position as industry leader."

In a weak economy such as the current one, the prestige beauty category often proves resilient even as consumers tighten spending. The prices of lipstick and other beauty products are sufficiently modest to allow women to satisfy the urge to splurge without spending much.

Trends also favor Estee Lauder.

Freda said China is "the fastest-growing beauty market." Estee Lauder's sales in China jumped 28% in local currency in fiscal Q4.

The company's footprint in China grew from 38 to 58 cities on a year-ago basis. More growth is planned.

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06/05/2015 05:05 PM ET

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